Dry Bulk Winners & Losers: DryShips

NEW YORK (TheStreet) -- Dry-bulk shipping stocks ended trading mostly lower Tuesday -- with one of the lone exceptions being fan-favorite DryShips (DRYS), whose shares climbed 2% -- as the volatile sector cooled off after a wild ride the last few weeks.

Dry-bulk shipping rates appear to have moderated following a heady run-up throughout most of November. On Tuesday, the Baltic Dry Index, which tracks spot-market rates across all vessel sizes, fell 2%, while the average capesize rate slipped by 3% to below $80,000 a day.

A week ago, some bookings on the spot market for capesize ships -- the biggest dry-bulk carriers on the high seas and the ones primarily responsible for bringing iron ore to the frantic steel mills of China -- surged above $100,000 a day, the highest prices fetched since before the crash last fall.

Continued robust demand from China for raw materials (induced by the country's stimulus) had fueled the November spike in rates, which one analyst called a "booking frenzy," with giant mining concerns competing to hire ships like city-dwellers hailing cabs on a rainy day. The fallout from that frenzy continues: major dry-bulk ports remain seriously congested, which some analysts believe will provide at least some "support" for shipping rates over the near term, since port congestion takes supply off the market.

Driving the run-up in dry-bulk shipping rates, however, has been a strengthening in Chinese steel prices -- though they did decline a bit at the end of last week -- an indicator that buttresses sentiment in the capesize market. As long as steel prices are going up, so too will demand for the ore that feeds the furnaces, or so the logic goes.

Despite the softening in shipping rates over the last few days, some analysts have therefore taken heart: Chinese steel prices have shown no signs of dropping off -- and this, they say, should protect shipping rates -- and, evidently, shipping stock prices -- from a severe retrenchment.

Over the short-term, though, the major mining concerns have backed away from the shipping spot market to a large degree. Though Rio Tinto did book a capesize on the Australia to China route for $18.50 a ton on Tuesday, that's down from the $20 a ton the same route obtained a day earlier.

Over the long-term, the concern remains the same: everyone still worries about a coming glut of dry-bulk ships, as fleets of newbuildings ordered during the boom years are expected to come into service next year.

Gregory Lewis, a stock analyst at Credit Suisse ( CS), said in a note that an informal survey of Greek shipping operators showed that they foresee asset values for dry-bulk ships themselves to fall next year by 5% to 10%.

On Tuesday, nearly all U.S.-listed dry-bulk equities were in the red, if moderately so.

Leading the decliners for much of the session was Star Bulk Carriers ( SBLK - Get Report), which reported its third-quarter earnings Monday after the bell. The Greek outfit beat Wall Street expectations, but did so on the back of $2.8 million in gains on its positions in FFA contracts, or shipping-rate futures, according to Dahlman Rose analyst Omar Nokta. Many companies use FFAs as a hedging instrument.

Star Bulk has taken a conservative approach to chartering. It has fixed 100% of its fleet's operating days into charter contracts for the rest of 2009, and 80% for 2010. Nokta pointed out in a note to clients that Star Bulk has been able to rid itself of charterers who have been in financial trouble , replacing them with more "credit worthy counterparties, such as Cargill," the privately held grain distributor.

Still, investors sent Star Bulk's stock price down as much as 6% during the session. In the final hours of trading, the shares clawed back some of those losses, closing the day at $3.40, down 2.6%, on more than double the daily average volume.

Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.